This week we wish to briefly visit the Standard & Poor’s (S&P) – the international rating agency –change in its rating from stable to negative for The Bahamas. However, before getting into this report, perhaps it would be useful to briefly describe what S&P is and what purpose it serves.

S&P is an American financial services company. It is a division of the McGraw­Hill group of companies that publishes financial research and analysis on stocks and bonds. It is well known for its stock market index – the U.S.­based S&P 500. The company is one of the Big Three credit rating agencies, which also includes Moody’s Investors Service and Fitch Ratings. As a credit rating agency, the company issues credit ratings for the debt of public and private corporations.

In issuing its report on The Bahamas, S&P further warned that a downgrade is possible if the government does not take immediate steps to develop a credible “medium­term plan” to address the national debt.

We have opined on numerous occasions in the past (as early as September 2003 and as recent as February 2012) when we wrote about “The cancer of debt” and the need to take a serious look at our national debt and to address the growing debt problems. On each occasion we issued the warning that we would find ourselves in an untenable position if we did not act decisively.

What does the negative outlook mean for The Bahamas? In the first instance, it means nothing other than a warning that the policymakers have to make some tough decisions or else we will be down­graded; an event which will have serious unintended consequences for every aspect of Bahamian life as we know it.

Sovereign debt ratings are reports that all foreign direct investors look at before making their decisions to allocate capital.

Regrettably, this is not the first time we have been warned by an international agency. Back in 2003 the International Monetary Fund’s (IMF) Article IV Consultation Report on The Commonwealth of The Bahamas raised several key concerns, namely:

a. The failure of the Bahamian government to take aggressive measures to reduce large fiscal deficits and the growth of public debt.

b. The failure of the Bahamian government to take even small steps in addressing the need for serious tax reform.

c. The failure of the Bahamian government to take any measures to address the impending financial crisis in the National Insurance scheme.

d. The failure of the Bahamian government to deal with the country’s steady loss in external competitiveness; in particular, the need to undertake structural reforms in labor markets to reduce costs and the need to privatize utilities to lower utility costs.

e. The repeated failure of the Bahamian government to develop current national income accounts that would support informed policymaking.

What to do

Does this not all sound familiar? Some nine years later we have yet to address in any substantive way the issues raised in the 2003 assessment by the IMF. Any further delay in developing a comprehensive response to these issues could have significant negative implications for our economy. Indeed, the economy is likely to face serious headwinds over the near term and depending on which set of economic policy responses is selected, we could experience further increases in our unemployment numbers; a warning which we articulated in a recent article.

We believe it is time for the government to appoint a bi­partisan group to take a holistic view of oureconomy and report back within six months with an informed, pragmatic and easily executable plan.

The S&P statistics only focused on the government’s direct debt. If we were to include the contingent liabilities it becomes alarmingly clear that our debt­to­GDP ratio is fast approaching 62 percent.

What’s worse at this particular time is the combination of slow economic growth, the increased liquidity in the system, the reduction in credit growth (which means the economy is slowing or at least not growing) and the decrease in foreign currency reserves. That combination does not make for a good ending to the movie.

We wrote back in February this year: “One of the single biggest issues facing us is our national debt. We are fast approaching the point when we will no longer be able to borrow at favorable rates in the international market. Although it is several years in the making we have time to change course and address some of the issues. We cannot continue to run deficits along with unfunded liabilities which we never speak about – i.e., civil servant pensions with no plan to address how we plan to grow our economy. Debt is not all bad when used prudently. It is a problem when we borrow to meet interest payments and recurrent expenditures – i.e., civil servant salaries etc. We cannot afford to kick the can further down the road. We have a moral obligation to address this issue while we are in a position to do so. If we do not, we will soon find ourselves like some of the European countries…”

We went on to say: “We believe dealing with the deficit is the single most important factor for the future of The Bahamas. Some would argue that crime and education are equally important. Some studies have shown that when economies are doing well, crime and social ills decline and accordingly, the main focus must remain on the economy. Without the financial ability to provide funding to fight crime and provide education, we would only get worse not better.”

We further stated: “We believe this upcoming election should ultimately be about dealing with the deficit and putting the country on a path to sustainable budget deficit, one that is less than the growth rate of our country. Not dealing with this issue runs the real risk of many problems, including harsh penalties by international agencies such as the IMF. It would in the long run affect our sacred one­to­one dollar peg to the U.S. dollar. Although no one likes to talk about it… we can’t afford to put our head in the sand like the ostrich and pray it away. In order to maintain a strong currency we have to develop a coherent plan to grow our country.”

The growing debt and the deficit is a deadly cancer on the economy. Our current total debt (direct and indirect) is approaching $4.756 billion. The interest burden on the total debt is nearing 18 percent. If we continue along this trajectory we can hit 20 percent shortly.

If we add in government “operating” costs of nearly 70 percent of revenue, you can easily see that government shortly won’t be able to deliver basic services. It will deliver a mortal blow to the economy if not dealt with. Putting off treatment, as we all know, will not make the cancer go away by itself, and the cancer of our debt is clearly growing and malignant. It will soon overwhelm our national economic body.

But dealing with a cancer is not without cost and pain, whether on a real personal level or a metaphorical national level.

We should never let a good crisis go to waste. Yes we are not at the crisis or tipping point, but we are getting closer. Our economic structure, as it currently stands, is just unworkable and if we are to move forward we can expect to do so with more than minimal pain. Our structure assumes government knows best how to allocate capital and that fallacy along with others must be swept away if we are to successfully navigate this country through this challenging period.

With regards to the problems facing The Bahamas in the next few years, there is no easy solution. There are no easy choices. The choices we eventually make will have both short­term and long­term consequences. We should then plan carefully.